Facing foreclosure of your mortgage and possibly being forced from your home is daunting under any circumstances. For borrowers age 62 or older, it can seem hopeless, particularly if you are living on a fixed income and cannot find more affordable housing.
For some, getting a reverse mortgage could provide the solution that borrowers need to stay in their home and pay off their existing mortgage. But is it the right choice? There are many factors to consider in determining whether getting a reverse mortgage to stop a foreclosure will work for your situation. In many cases, it’s not the best option.
- You must have enough equity in your home to pay off your existing mortgage.
- You have to pay taxes, insurance, and homeowners association fees on time to avoid foreclosure of a reverse mortgage.
- You will lose some or most of your home equity if you get a reverse mortgage.
Traditional vs. Reverse Mortgages
It’s important to know how a reverse mortgage works before applying for one. With a traditional “forward” mortgage, you borrow money to buy your home. You then repay that money over the loan term—usually 15 to 30 years—in monthly installments. As you make your monthly payments, you pay down the loan balance and increase the amount of equity that you own in the home.
With a reverse mortgage, you borrow money against your home, meaning that your home guarantees the loan. If you fail to pay back the loan, you forfeit your home. You can use the proceeds of the reverse mortgage to pay off your existing mortgage. Any remaining proceeds are yours to use as needed. Over time, the loan balance on the reverse mortgage increases and the amount of equity that you own decreases. A reverse mortgage is repaid when you no longer live in the home—by selling the home, moving out, or dying.
Using a Reverse Mortgage to Stop Foreclosure
The majority of reverse mortgages are called home equity conversion mortgages (HECMs). HECMs are backed by the Federal Housing Administration (FHA) and issued by an FHA-approved lender. To qualify, you need to be age 62 or older and have enough equity in the home to pay off your existing mortgage loan.
If you do qualify for a reverse mortgage and are able to pay off your existing mortgage to avoid foreclosure, that solves the immediate problem. However, that leads to potential problems going forward. First, you lose some or most of the equity that you have in your home, so you cannot draw on it for future expenses, such as medical bills.
Also, if you do not meet the following HECM requirements, your mortgage lender could foreclose on your reverse mortgage:
- You must pay your property taxes, homeowners insurance, and homeowners association (HOA) fees on time.
- You must keep your home well-maintained and make repairs as needed.
- You must remain in your home for the majority of the year.
In addition, if you die, permanently move out of the home (for example, into an assisted living facility), or sell the property, then the reverse mortgage loan is due immediately.
If you do not have the funds to pay your taxes and insurance or to keep your home properly maintained, you could face foreclosure with a reverse mortgage.
Another consideration: While receiving payments from a reverse mortgage has no impact on Social Security benefits or Medicare eligibility, the proceeds from this type of loan could impact how much you receive from Medicaid and Supplemental Security Income (SSI).
Medicaid and SSI assistance is based on an individual’s current financial assets and monthly income, and reverse mortgage proceeds could exceed those program limits, meaning that you won’t qualify for either one.
Other Options to Avoid Foreclosure
While a reverse mortgage may sound like the perfect solution to a traditional mortgage foreclosure, it’s important to consider all your options before taking that step. Here are other choices:
Refinance your mortgage—Talk with your mortgage lender to see if you can refinance your existing mortgage with a lower interest rate and/or longer loan term. These options could reduce your monthly payment so that it is more affordable.
Loan modification—Talk with your mortgage lender to see if you can change the terms of your existing mortgage so that you can afford the monthly payments. This could include reducing your interest rate, extending the loan term, or reducing your principal loan balance.
Sell your home—If you are unable to refinance your existing mortgage or get a loan modification, you may need to sell your home and move into more affordable housing.
Reduce your expenses—You may be able to receive assistance from state and local programs to help pay your utilities and fuel expenses. Also, check with your county or city tax office to see if there are ways to reduce how much you pay in property taxes. These savings could provide the extra cash that you need to pay your mortgage.
Consult with Professionals Before Making a Decision
Taking out a reverse mortgage should not be an impulse decision. Instead, it’s important to speak with professionals who can provide more information to help you make the best decision for your financial future.
To qualify for an HECM, you’ll need to speak with a U.S. Department of Housing and Urban Development (HUD)-approved counselor first. But don’t stop there. If you have a financial planner or an estate planning attorney, speak with them as well to see how a reverse mortgage will affect not only your current finances but also any financial assets that you plan to leave your heirs. Talking with a consumer protection lawyer is also a good idea to make sure that you know the ins and outs of using a reverse mortgage to prevent foreclosure.
Are home equity conversion mortgages (HECMs) the only reverse mortgages available?
Home equity conversion mortgages (HECMs) are the most common reverse mortgages, but there are also proprietary reverse mortgages and single-purpose reverse mortgages.
The former allows a homeowner to take out a larger loan than an HECM. Proprietary reverse mortgages are for homes valued above the Federal Housing Administration (FHA) limit of $970,800; the limit for proprietary reverse mortgages is $4 million. Unlike HECMs, proprietary or jumbo reverse mortgages are not insured by the federal government and carry few regulations.
Single-purpose reverse mortgages are typically issued by state and local governments or nonprofits, not private lenders. Rather than paying for everyday living expenses, single-purpose reverse mortgages are typically designed to pay for something specific, such as home repairs or property taxes. Fees for single-purpose reverse mortgages may be lower than for other reverse mortgages.
Besides getting a reverse mortgage, how else can I avoid foreclosure?
Talk with your mortgage lender. You may be able to refinance your mortgage or get a loan modification to get a lower interest rate or a longer term for repayment on your loan. Or you may need to sell your home and find more affordable housing.
Will getting a reverse mortgage affect my Social Security payments?
No. Social Security payments are not affected by a reverse mortgage. And the loan payments that you receive are not considered taxable income by the Internal Revenue Service (IRS). However, a reverse mortgage could impact any Supplemental Security Income (SSI) that you may receive. SSI assistance is based on your current financial assets and monthly income, and it’s possible that the proceeds from a reverse mortgage would exceed the SSI limits.
The Bottom Line
When you’re faced with foreclosure, a reverse mortgage can sound like the perfect solution. After all, your existing mortgage will be paid for, and you will no longer have to make monthly payments. But the ramifications of a reverse mortgage can be much more complicated than that, so it’s important to know exactly what you will face before signing that loan application. You may find that there are better options to prevent a foreclosure and protect your financial assets.